Tag: business-standard

What does sociology have to do with exports?

Ashish2 Comments

When we designed the undergraduate program for economics at the Gokhale Institute, we were unable to fit in introductory courses on philosophy and anthropology. Among other courses, I should mention – it is not as if the absence of only these courses is my sole regret. But these two pinched more than the others, I’ll admit.

But one course that was included was sociology, and the reaction to it being a part of the syllabus has been mixed. “What is the use of studying sociology?” is a refrain I’ve heard for the past three years, and I wish it weren’t so. Why? Because not all answers to problems in the field of economics lie within the domain of economics.

I’ve long been convinced that “matters of culture” are central for understanding economic growth, but I’m also painfully aware these theories tend to lack rigor and even trying to define culture can waste people’s time for hours, with no satisfactory resolution.

https://marginalrevolution.com/marginalrevolution/2018/12/deconstructing-cultural-codes.html

Tyler Cowen is speaking here of culture, of course, not sociology, but the two are at least related – and in my opinion are practically the same.

But it is all very well to talk of the importance of sociology when it comes to studying economics. But what exactly does it mean?

TCA Srinivasa-Raghavan wonders, in a recent column in the Business Standard, about why India just can’t crack the export problem, no matter what we try:

The latest trade data once again show that India hasn’t been able to solve its export problem. Over the last 75 years, India has succeeded in solving many problems. Food, health, education, low GDP growth rates, and much else. But there is one problem it has been unable to solve — exports.
At least a dozen committees over 60 years have tried to find solutions. The government itself has been straining hard to provide all kinds of incentives. All manner of policies have been tried. Nothing has worked.
India, despite its amazing businessmen, remains a poorly performing exporting country. Even the success of IT exports is really labour export in a disembodied form.

https://www.business-standard.com/article/opinion/why-does-india-continue-to-have-an-export-problem-sociology-may-answer-122120500165_1.html

And, he says, if India’s best and brightest economists cannot solve thhis problem, perhaps we should be looking to other domains. What about, he says, sociology?

For instance, is something about our business communities responsible for this failure? Is it the nature of our political and administrative structure? Or is it a combination of all these things?

https://www.business-standard.com/article/opinion/why-does-india-continue-to-have-an-export-problem-sociology-may-answer-122120500165_1.html

What might be the problem with our business communities? Is jugaad a good thing or a bad thing? Why are we so dependent on, and happy with, the concept of jugaad? Do we take quality as seriously as our competitors? If not, why not? Did our competitors take quality seriously in the past? If not, what made them change?

Is our administrative structure a little too overbearing? If so, why? Is it because of misaligned incentives, as an economist would say, or is there something else “there”? If so, what? What makes our bureaucracy different from those in other countries, from a sociological/cultural viewpoint? Have we always been different?

Not all of these questions have answers exclusively within the domain of economics. It makes sense to study other domains, and ask how the study of those domains enriches your understanding of economic theory. It cuts both ways, of course. While studying those other domains, your study of economics will help you too!

Now, I don’t know, alas, what sociology has to do with India’s poor export growth – if anything at all. But it certainly is a fun question to think about, and is a great example of why studying sociology as a student of economics absolitely makes sense.

One final point. I’m often asked this question by students who are just about starting to learn economics: “What should I read to understand economics better?” They think I’m being deliberately difficult when I answer by saying “absolutely everything that you can read, and not just within the field of economics”.

I’m not, of course. I couldn’t possibly be more serious!

Past posts on EFE that have mentioned sociology can be found here.

Incentives Matter, and so do Externalities

Ashish1 Comment

In my Principles of Economics classes, I spend a lot of time explaining what I think are the six core principles of economics:

  1. Incentives Matter
  2. There Is No Such Thing As A Free Lunch
  3. Trade Matters
  4. Costs Matter
  5. Information Matters
  6. Externalities Matter

Note that the fifth point is really about prices, which are really about information.

And a recent blogpost by Gulzar Natarajan, one of my favorite bloggers from India, showcases two of these principles really well: incentives, and externalities.

When compared to the task at hand, relocating supply-chains especially from China and attracting global contract manufacturers in various sectors to establish facilities in India, the PLI scheme outlay at Rs 1.97 trillion (~$25 bn) over five years is modest. The scheme extends 4-6% subsidy on incremental sales. However, this is only a small share of the at least 18-20% cost advantage, not to speak of several other locational and supply-chain advantages, enjoyed by manufacturers in China and Vietnam. This coupled with stiff production expansion targets the inevitable bureaucratic difficulties with accessing these benefits mean that the substantive benefits from PLI Scheme are limited. In fact, a recent Bloomberg Intelligence report estimates that it would taken about 8 years to move just 10% of Apple’s production capacity out of China. 

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

The PLI scheme incentivizes the domestic manufacture of products across fourteen sectors, by providing subsidies linked to “incremental sales from products that are manufactured in domestic units”. That quote is from the Wikipedia article about the scheme, which is a good place to begin reading more about PLI.

On the face of it, you might think that Gulzar Natarajan’s take on the PLI scheme is a negative one. Because even if the scheme is fully utilized, it still falls short of China’s 18-20% cost advantage, plus the locational and supply chain advantages enjoyed by China (and Vietnam). In fact, as he goes on to say in the blogpost, “the PLI is unlikely to be substantive enough to be a game changer for India’s manufacturing sector”.

Worse, as a Business Standard article that the author links to points out:

Global players have raised concerns on the slow and complex disbursement process, causing some of them to question whether they want to go ahead with their investment commitments under the scheme. Others are questioning the qualifying criteria. And still others are struggling with the “China factor”.

https://www.business-standard.com/article/economy-policy/govt-takes-plis-back-to-the-drawing-board-amid-critical-challenges-122092101038_1.html

But neither the Business Standard article, nor Gulzar Natarajan’s blogpost should be construed to mean that the PLI scheme is a failure (not yet, at least). The Business Standard article points out that the silver lining to the rocky start to the PLI scheme is the willingness of the government to listen (about which more later). And Gulzar Natarajan points out that a good way to think about the PLI scheme is to think of it as a complement to marketing campaign of Make in India. If (my emphasis, not GN’s) the PLI scheme is able to “attract the critical mass of a few big contract manufacturers to establish massive manufacturing facilities in the country”, that in and of itself will be a Very, Very Good Thing.

Which brings me to the second principle of economics at play in this blogpost: externalities matter.

This is perhaps an example to avoid evaluating policies based solely on their substantive merits. The circumstances and their externalities matter, and are often more important than the policies themselves. To put this in perspective, if India’s manufacturing sector moves to the next level in scale and productivity towards the later part of the decade, I’m inclined to argue that while the PLI’s contribution by itself would be small (say, less than a tenth), it could not also have happened without the PLI Scheme.
When examining policies, researchers and commentators fail to see the larger context in which they are being implemented. They are blind to the complex theory of change associated with major policies. More often than not, transformational changes in health, education, nutrition etc are not brought about through technocratically designed and targeted policies. Instead they are brought about by community and stakeholder mobilisation, which engenders a virtuous cycle of ownership and engagement, and which can in turn be triggered by standard policies and programs which are effectively implemented. The entire process has space for improvisation and innovation to improve design and implementation quality.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html (emphases added)

Sure, it is entirely possible that the PLI scheme doesn’t meet its stated aims and targets. But if it acts as a catalyst in terms of better scale and productivity, thereby giving a boost to India’s manufacturing sector in the medium to long term, that would be a great start. That is, the positive externalities wrought by the scheme might end up mattering more – and that is just fine.

But.

If you are a student of economics intending to eventually work in the realm of policy-making, you would well to focus on the phrase “community and stakeholder mobilization”. You can come up with the most well-thought-out policy in the world, but it means nothing if you don’t have a) community buy-in and b) the ability to listen to feedback and rework your policies iteratively.

In The Service of the Republic, Ajay Shah and Vijay Kelkar describe Satya Poddar’s four-step policy process:

  1. Defining the future state, or the preferred policy outcome,
  2. Preparing a blueprint for the design and specification of the future state,
  3. Defining the transition path from the current to the future state, and…
  4. Building political consensus or garnering public support for the change.

Of which, the fourth step is often ignored or downplayed, to the detriment of the whole scheme. Remember, announcing a scheme isn’t policymaking. That’s the easy bit. Making it happen is the real challenge, and that requires having a very sensitive ear to the ground at all times.

And that’s why the willingness of the government to listen matters so much, for the success of the PLI scheme depends (very much so) on our ability to tweak it as we go along.

…the success of the Scheme will depend on how nimble, flexible, and courageous are the relevant Ministries of Government of India in responding to emergent problems and trends and adapting the scheme guidelines(say, in calibrating import duties up the value chain). Policy making will have to become entrepreneurial in being able to reap gains from the PLI Scheme.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

Re: the break on the blog (the last post was on the 19th of September): I just felt like taking a break, so I did. 🙂

TN Ninan on The Misery Index

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More often than not, inflation and unemployment move in opposite directions. Why this should be so, and whether this actually is so, are questions that can get a lot of economists very hot under the collar very quickly! 

But every now and then, this relationship breaks down very quickly, and we’re then staring at a problem that economists refer to as stagflation. That, in effect, is when inflation is stubbornly high, but unemployment is also stubbornly high. TN Ninan, a columnist for the Business Standard, riffs on this and related concepts in an excellent recent column. 

In particular, he drags up an idea that most of us haven’t heard about lately, the misery index. Given what’s around us these days, though, you might want to construct such an index for the months to come! What is the misery index, you ask? Well, simply add up the rate of unemployment and the rate of inflation for any given economy! It’s a simple enough index to create, and you can learn a fair bit by taking a look at which countries are doing well (low on the misery index), and which countries are the unfortunate table-toppers. 

As the column points out, Turkey, Argentina and South Africa top these charts, and Brazil and Russia round off the current top five. But most major economies are inching up this particular chart, and this is something you want to keep an eye on in the days to come. Here is more information, if you’re interested in learning more about the misery index.

Now, as with ice-cream flavors, so also with indices such as these. You can add in different flavors and come up with many different variations. So it was only a matter of time before somebody thought of adding in interest rates to create a new version of the misery index. Imagine living in an economy with high inflation, high unemployment and high interest rates! And if you want a little-bit-of-everything-when-it-comes-to-macro index, well, throw in per capita growth rates too. Note that this last addition actually makes it rather less of a misery index, since high per capita growth is a good thing.

And finally, TN Ninan’s column also mentions another interesting, relatively recent idea that you might want to explore yourself: The Great Gatsby curve. Take a look at what it means, and reflect on how appropriate the name is.

Literature and economic theory – who’d have thunk it, eh?

Where Next For the NITI Aayog?

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The NITI Aayog must be converted from a Department of Development Implementation to a High Command of Development Strategy.

https://www.business-standard.com/article/opinion/reforming-the-niti-aayog-122051601487_1.html

That’s the very last sentence of a thought-provoking column by Nitin Desai. The column is about why the NITI Aayog (in Nitin Desai’s opinion) hasn’t done all of what was hoped of it, and what needs to change for some of these hopes to be realized.

But for us to reach the end of this column, we need to start somewhere, and we’ll start with the setting up of the Planning Commission.

The Indian planning project was one of the postcolonial world’s most ambitious experiments. It was an arranged marriage between Soviet-inspired economic planning and Western-style liberal democracy, at a time when the Cold War portrayed them as ideologically contradictory and institutionally incompatible. With each Five-Year Plan, the Planning Commission set the course for the nation’s economy. The ambit ranged from matters broad (free trade or protectionism?) to narrow (how much fish should fisheries produce to ensure protein in the national diet?). The Commission’s pronouncements set the gears of government in motion. Shaping entire sectors of the economy through incentives, disincentives and decree, the Planning Commission’s views rippled across the land to every farm and factory. Despite this awesome power, economic planning in India was considerably different from the kind practised in communist regimes. The Planning Commission was reined in by democratic procedure that required consultation with ministries in an elected government, with people’s representatives in Parliament—and ultimately with the popular will—through citizens voting every five years.

Menon, Nikhil. Planning Democracy (p. 9). Penguin Random House India Private Limited. Kindle Edition.

That’s from a book I’m currently reading (and thoroughly enjoying), Planning Democracy. There’s a lot to like about the book, and I hope to write a full review once I’m done, but for the moment, think about just the title. There’s a (hopefully healthy) tension implicit in it, because as the excerpt above puts it, the Planning Commission was to be reined in by democratic procedure.

What was it supposed to do? Further on in the same chapter from the book I have just quoted is a nice compact description of what was supposed to have happened:

Its potency stemmed from its authority to draw up an economic roadmap for the country and back it with all the resources and policy instruments available to the Government of India.

Menon, Nikhil. Planning Democracy (p. 21). Penguin Random House India Private Limited. Kindle Edition.

That is, there are two separate but interlinked things worth noting: it had to develop an plan of economic development for a newly independent India, and in order to do so, it had the backing in terms of resources and policy instruments. By the way, there is a reason the word “resources” has not been qualified with a word like financial – the back was not just financial, but also political, given the presence of the Prime Minister and other cabinet ministers as members.

The story of how the Planning Commission evolved, struggled, and refined itself over time (not always successfully, it should be mentioned) is a fascinating one, but not one that we can cover in a single blog post, alas. But long story (very) short, the Planning Commission came to an end in 2015:

Born the same year, Modi and the Planning Commission shared another milestone together. In his first Independence Day address as India’s leader, Modi declared that the Planning Commission had once merited its place and made significant contributions. Now, however, he believed it had decayed beyond repair. ‘Sometimes it costs a lot to repair an old house,’ he said, ‘but it gives us no satisfaction.’ Afterwards we realize ‘that we might as well build a new house’, Modi explained with a smile. He would build it by bulldozing a decrepit structure and raising a shiny new one, the NITI Aayog (National Institution for Transforming India).

Menon, Nikhil. Planning Democracy (p. 8). Penguin Random House India Private Limited. Kindle Edition.

And how has the NITI Aayog done?

But despite progress in these areas, some 7 years since the establishment of NITI Aayog, questions are being raised as to whether India can continue to function without medium-term planning. Annual budget allocations are made by the Finance Ministry to meet various investment goals and objectives but without a well-defined plan. NITI Aayog’s advice is also not taken seriously by state governments as it comes without resources. Some feel that NITI Aayog should have resources it allocates to address development imbalances and that the Ministry of Finance is naturally focused on budgetary management rather than development outcomes.6While no one wants a return to the old Planning Commission, a more involved and competent NITI Aayog, with a stronger voice is clearly needed.

Ajay Chhibber, 2022. “Economic Planning in India: Did We Throw the Baby Out with the Bathwater?,” Working Papers 2022-03, The George Washington University, Institute for International Economic Policy.

The idea itself isn’t all that new. Back in 2019, Vijay Kelkar had given a speech in which he proposed “NITI Aayog 2.0”:

It should rather strive to be a think tank with “praxis” possessing considerable financial muscle and devote its energies to outline coherent medium and long term strategy and corresponding investment resources for transforming India. Towards this, my preliminary study suggests that the NITI Aayog 2.0 will annually need the resources of around 1.5% to 2% of the GDP to provide suitable grants to the States for mitigating the development imbalance. These formulaic annual grants, whether capital grants or revenue grants for the relevant CSS will need to be conditional to ensure that (1) outcomes are commensurate and (2) it discourages an individual State to adopt policies that have negative policy externalities, e.g., creation of populist subsidies and thus avoid race to the bottom. Such presence of “negative policy externalities” we notice often, e.g., the provision of free “electricity,” irrigation water subsidies, etc. “Gresham’s Law” seems to be relevant not only for the currency markets alone!

Towards India’s New Fiscal Federalism, No. 252, NIPFP Working Paper Series, Vijay Kelkar (https://www.nipfp.org.in/media/medialibrary/2019/01/WP_252_2019.pdf)

If you don’t know what Gresham’s Law is, take a look here.

All of which eventually gets us back to the column that we started with, by Nitin Desai:

The real problem of strategy formation for development is that it is not being done. The NITI Aayog has produced some vision documents; but they are not agreed strategies formulated after widespread consultations with experts and discussion with the states. The word “niti” in the name of this organisation is an abbreviation for National Institution for Transforming India. This task requires looking a level above the designing of programmes to a strategy from which programmes must be derived.
A grand strategy for development must spell out the opportunities and threats faced by the key objectives of development which are growth, equity and sustainability. It must then identify the changes in the role of the public and private sector, shifts in global economic alliances and policy shifts that are required to maximise benefits from opportunities and manage risks from threats. The time frame for a grand strategy has to be long-term but the more specific strategies derived from it must take into account short- and medium-term challenges that the country faces.

https://www.business-standard.com/article/opinion/reforming-the-niti-aayog-122051601487_1.html

We need, that is to say, a NITI Aayog that focuses on not just reporting what has been (or is being) done, but also on explaining what needs to be done, over what time period, and why, along with some pointers towards what risks we might encounter. Or as Nitin Desai puts it, “The new Vice-Chairman, Suman Bery, must bring in the talent required and launch a process of broad-based consultation, particularly with the states, to secure a broad national consensus on a long-term growth strategy. Specific programmes must be based on the implementation of this strategy.”

Easier said than done, of course, but this is where NITI Aayog needs to go next.

Why Is Reading the News Online Such a Pain?

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Livemint, Hindu Business Line, Business Standard, Times of India, The New York Times, The Hindu, The Washington Post, The Economist, Bloomberg Quint and Noah Smith’s Substack.

These are, as of now, my sources of news online that I pay for.

There are other newsletters that I subscribe to and pay for (The Browser is an excellent example), and I read stuff published in other newspapers too, but I’m restricting myself to only the current news sources that I pay for. I would like to subscribe to the Financial Times and to Stratechery too, but my budget line begins to cough firmly and insistently at this point, more’s the pity.

But here’s the thing: reading news online sucks.

Some are worse than others, and I’m very much looking at you, Business Standard. Their app is a joke, and the number of times one has to sign in while reading the paper on a browser isn’t funny. Some are, relatively speaking, better. The NYT website and app are both pretty good, as is the Economist. But still, it isn’t friction free, and there really should be a way to get the user experience to be better than it is right now.

And more than better, a more urgent word is uniform. Here’s a simple use case: let’s say I want to read articles on the current lockdown in Shanghai. I have to go to each website, and either run a search, or navigate to the appropriate section. But on each website, the search button will be located in a slightly different place, with a slightly different user experience. Each website while have their own navigation system. Each website will have different ways to filter search results.

Some will allow you to copy excerpts, some won’t. Some will allow clips and force an appendage at the end (“Read More At XYZ” – I’m looking at you, ToI). But by the time I finish visiting the third website to read about the topic I wanted to – current lockdowns in Shanghai – I’m pretty much done out of sheer exasperation.

It shouldn’t be this hard!

Workarounds kind of exist. For example, I can add the RSS feeds to Feedly, or any other feed reader of your choice. If you’re not familiar with Feedly, or RSS readers in general, here is an old post about it. But the reason I say kind of is because most (if not all) newspapers will not provide the full article in the RSS feed. You have to click through to read the full thing.

Not much use, is it?

Which, to be clear, is entirely understandable. User tracking, ads, and all the rest of it, I get it. But it does mean that Feedly isn’t a great way to keep track of all these articles in one place.

What I would really like is an app/service that aggregates all news sources in full in one place, and allows me to sign in to premium news sources via that app/service.

Does such a service exist? Or are there workflows that solve this problem?

Please, do let me know!

Arbitrage and Writing

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Here are excerpts from two newsletters that you should consider signing up for if you are a student of economics:

In late June, the Reserve Bank of India (RBI), India’s central bank and the banker to the banks, released the household financial debt figures based on select financial indicators. Household financial debt is basically loans that you and I have taken from the formal financial system of the banks (both commercial and cooperative) and the non-banking finance companies (NBFCs).
Of course, there are other ways to borrow as well. One can borrow against gold as a collateral from a local jeweller or simply borrow from a local money lender or borrow money from friends and family, which is why, the RBI calls it household financial debt based on select indicators.
It needs to be kept in mind here that borrowing from the informal sources is perhaps easier but at the same time more expensive, given that the risk for those lending money is higher.
So, what does the RBI data tell us? In absolute terms, the total household financial debt based on select indicators has gone up from Rs 55.38 lakh crore to Rs 73.13 lakh crore, between June 2018 and December 2020.

https://www.livemint.com/mint-top-newsletter/easynomics09072021.html

That is from Vivek Kaul’s (relatively) new newsletter, Easynomics. It is written in Vivek’s trademark style: easy to read, gloriously simple sentences (which is hard to do!), and sprinkled with just enough additional information to keep you engaged as you read through his main points. In short, really, really well done.

Here’s an excerpt from the second newsletter:

Despite this, it is unreasonable to expect that the government will reduce tax on these two fuels. Why? Sample this: excise duties on petrol and diesel accounted for a whopping 28 per cent of the central government’s tax revenue last year. Which government would let such a bounty slip by, especially when the country’s economic recovery is fragile? Think about it.
And, unlike income tax and goods and services tax, which entail a collection cost, oil marketing companies just have to do a simple RTGS transaction to pay the fuel tax they collect from us to the government! The government then uses the money for a range of welfare schemes.

https://businessstandard.substack.com/p/a-litre-of-petrol-takes-up-30-of

This, to my mind, is equally easy to read! The point of this blogpost is to point out that both writers have created simple, easy to understand posts about aspects of the Indian economy that matter to the common Indian citizen.

And they have done this by taking data from government websites. This data, as I have discussed here before, is not always easy to acquire. But those of us who have done the hard work of understanding how it is captured, where it is stored, when it is released, and how to go about making it analyzable1, have an advantage over those of us who remain blissfully unaware of all this.

But those of us who are blissfully unaware wouldn’t mind reading about the implications of this data, only if somebody were to take the time and effort to acquire that data and write simple, useful takeaways about it.

In finance, this is called arbitrage:

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price. (Emphasis added)

https://en.wikipedia.org/wiki/Arbitrage

If you are an economics student, and you know where all this data hides, and you know enough about how this data impacts the daily lives of citizens, and you want to get better at communication, there is riskless profit to be made. Get the data, analyze it, write about it, and give it away for free.

You learn the art and skill of of acquiring this data, you learn the art and skill of analyzing it, you learn the art and skill of writing about it (and you only get better over time, so don’t worry if the first few pieces aren’t “great”). You get to publish stuff that you can put on your CV – in fact, as I am fond of saying, it has the power to quite literally become your CV. Folks get to read what you’ve written, and they therefore understand our field and its implications in their lives a little bit better.

Nobody loses out, and we all win!

And when that great and glorious day arrives, and governments in India acknowledge that the way they make data available to its citizens is crappy, you have the ability to write a series of posts about exactly how the government could do a better job in this regard.

Learn how to work with data if you are a student of economics in India, and then write about it.

It’s a great form of arbitrage.

  1. what an utterly horrible word![↩]

Understanding Fiscal Policy (3/3)

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You might want to read Monday and Tuesday’s post before you begin in on this one.

In today’s post, we conclude by thinking through the section titled “Making Space While The Sun Shines“

  1. I’ve used the analogy of a human body throughout this little series, and I’ll press the point a little further here.
    One major problem that crops up when treating a seriously ill patient is about both the strength and the duration of the dosage. How much should the dose be per day, and for how many days should the patient take the medicine?
  2. Similarly, when it comes to fiscal policy, how much is enough? What if you give too little of a push? Then the recovery is anemic. What if you nudge a little bit too much? We’re back in 2011-2014 territory – and please do read The Lost Decade!
  3. Which is where this section of the article becomes really important: there is no model, anywhere in the world, that tell you what to do now. That is a strong way to put it, but let me be clear: there is no model anywhere in the world that will tell you what to do now. The cause of this current crisis, the crossroads at which the Indian economy found itself before this crisis, the uncertainty about how this crisis will play out and eventually end, and the uncoordinated global response(s) to this crisis all put together mean that we economists don’t know for sure how much fiscal policy is too much. We don’t know for how long we should keep the fiscal stimulus going. We’re, as it were, flying blind.
  4. What Sajjid Chinoy is saying, however, is this: whenever you cross a certain threshold of the vaccination drive, you need to start the process of unwinding the stimulus. That is what this excerpt means:
    ..
    ..
    “Counter cyclicality must be symmetrical: supporting activity in times of a shock, but then quickly retreating to create space when vaccinations reach a critical mass and the recovery becomes more entrenched.”
    ..
    ..
    Will this actually happen? For India’s sake, let us hope so. Our track record is less than encouraging in this regard.
  5. Familiarize yourselves with the great r>g debates. In this decade, they’re going to matter.
  6. Familiarize yourselves with the meaning and the importance of the primary deficit.
  7. Familiarize yourselves with the what the phrase “dual mandate” means when it comes to monetary policy.
  8. Pts. 5 through 8 are hopefully going to be areas that you will cut your teeth on if you join the market as a macroeconomist over the next five years. Hopefully because if we are still on pts. 2-4 until that point of time, this pandemic will obviously still be with us.
  9. But if it has gone by then, (god, I hope so!), managing the recovery and its aftermath will the macroeconomic challenge of this decade.

Understanding Fiscal Policy (2/3)

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This post should be read as a continuation of yesterday’s post.

What are the things to keep in mind when talking about fiscal policy for India in 2021? Sajjid Chinoy mentions two, and we’ll deal with the first of these in today’s post. It is called “Recalibrating To New Realities“

  1. Sajjid Chinoy first points out the fiscal deficit situation. Please, whether you are an economics student or otherwise, familiarize yourself with the budget at a glance document. My take on the fiscal deficit for the FY21-22 is that there is no way on earth we’re going to be able to stick to the budgeted 6.8%. Tax revenues will be lower, borrowing will be higher, and I’m not buying the INR 1,75,000 crores disinvestment target. I hope I am wrong!
  2. He recommends not cutting expenditures even if budgeted revenues don’t materialize, and expanding MNREGA funding – and I completely agree.
    We’re getting into the weeds a little bit, but he also speaks about cash transfers instead of MNREGA given the pandemic, and I agree there too. Effectively, he is saying that people might not choose to apply for work because of the fear of getting infected, so drop the cash for work requirement: just transfer.
  3. “Double down on achieving budgeted asset sales targets, because this will provide space for more debt-free spending.” is one of his recommendations. I agree with the message, but find myself to be (very) cynical about the likelihood of this happening. We haven’t managed to meet these targets even once, and were off by an impossibly large magnitude this year, so I don’t see this happening. Again, I hope I am wrong.
  4. I’m paraphrasing over here, but the implicit request by the author is to keep capital expenditure sacrosanct (because of the multiplier effect). The implicit bit is the corollary: if sacrifices must be made, it is in revenue expenditure. The cynic in me needs to be reined in, but I’ll say it anyway: good luck with that.1
  5. Finally, he makes a request of monetary policy, that is acts as a complement to what is written above. That is, monetary policy should not worry about inflation too much this year. It is more complicated than that, of course, but that’s a separate blogpost in it’s own right.
  1. Let me be clear, I agree! I just don’t see it happening, that’s all[↩]

Understanding Fiscal Policy (1/3)

AshishLeave a comment

I wrote this last week on the basis of this write-up by Sajjid Chinoy. The sequel came out last week, so let’s read through it together.

First things first:

  1. During times of a crisis, such as the one we are going through, it may be helpful to think of the economy as a sick person. That would make us economists and policymakers the diagnosticians and doctors respectively.
  2. Us diagnosticians often like to think about why the person got sick. Was it because of some previously administered medicine? Was it because of some external factor? Maybe both? That is, we identify the disease, and the cause of the disease.
    In this case, the economy is struggling because of the lockdowns and the uncertainty about (at least) the near future. Those are the symptoms. The cause is, of course, the virus.
  3. The doctors – that is, the policymakers – will want to remove the cause behind the economy’s illness first. That is what Sajjid Chinoy means when he says: “With a health crisis at the genesis of the current situation, it’s tautological to say that ramping up vaccinations is the “first-best” solution to tackling the crisis.” That is the cause of the crisis, and removing the thing that causes the crisis is of paramount importance.
    The “how to do this best” question has troubled all of us, and continues to trouble us, and it is worth your time to keep tracking this issue. And it is a great way to learn about how to think about public policy.
  4. But treating the symptoms (and the manifestations) of the cause is equally important. Job losses, reduced investment, reverse migration, subdued demand, rising inequality, reduced incomes, the exacerbated lack of social safety nets are all symptoms and manifestations of the crisis. How to treat the symptoms? That is where Sajjid Chinoy’s second article comes into play.

There are two courses of treatments available to us diagnosticians and doctors: fiscal policy and monetary policy. Sajjid Chinoy argues (and in my opinion, does so convincingly) that monetary policy has done all the heavy lifting it could in 2020, and there’s not much left in the RBI’s arsenal.

Monetary policy was the prime mover last year and markets will inevitably clamour for that pedal to be pressed even harder. But quite apart from the fact that monetary conditions are already very accommodative and core inflation has averaged 5 per cent since the start of 2020, what’s less appreciated is the reduced efficacy of monetary policy in periods of elevated uncertainty. That’s because monetary policy ultimately relies on economic agents (households, businesses, banks) to act on the impulses it imparts. But when agents are faced with acute health, income and macroeconomic uncertainty, they often freeze into inaction (“the paradox of thrift”). So households don’t borrow, businesses don’t invest and banks don’t lend. This is evident in the evolution of bank credit over the last year in India. Despite negative real policy rates and falling real bank lending rates, credit growth has continued to slow all year long, likely reflecting these uncertainties.

https://www.business-standard.com/article/opinion/fiscal-vs-monetary-policy-under-uncertainty-121052401432_1.html

Homework: What is core inflation? Where is this data to be gotten from? Where do we get data on the evolution of bank credit from? What are negative real policy rates? What are falling real bank lending rates? Where do we get that data from? What is credit growth? Where do we get that data from?1

Which means we must now think about how to best deploy fiscal policy.

The baton must, therefore, pass to fiscal policy. While fiscal policy cannot mitigate the health uncertainties it can help alleviate income and macroeconomic uncertainties. Stronger spending will not only boost activity but, in so doing, will reduce demand uncertainties for firms. Furthermore, income support (in cash or kind) along with public-investment-indu­ced-job-creation can alleviate income uncertainties for households and thereby help catalyse the private sector.

https://www.business-standard.com/article/opinion/fiscal-vs-monetary-policy-under-uncertainty-121052401432_1.html

Sajjid Chinoy highlights two broad areas to think about in his article:

  1. Recalibrating To New Realities
  2. Making Space While The Sun Shines

There is much to agree with (and add to) in each of these cases, and I’ll do so in the next two blogposts.

But the bottomline across both articles, for students of macroeconomics, is this:

  1. Think of the economy as a human body. Like the human body, the economy is impossibly complex, and all of its underlying connections, mechanisms and responses aren’t entirely clear.
  2. Like a good diagnostician, it is important to keep tabs on a variety of different metrics on an ongoing basis. That’s what Sajjid Chinoy’s first article should mean to you – and therefore this blogpost is homework you really should do.
  3. Once you have enough data about the patient, a good doctor should be able to recommend potential cures. As with the human body, so with the economy: different doctors will recommend different treatments, and for many (mostly good) reasons. This is the part that gets really tricky.
  4. Sajjid Chinoy’s recommended course of treatment is his second article. As a student, you must try and understand why he recommends this course of treatment and no other, and ask yourself to what extent you agree with him. If you disagree with him (which is fine!), you should be able to tell yourself why – from a theoretical viewpoint.
  5. For example, you may disagree with him and say that India can still effectively deploy monetary policy. Maybe so, but you must have theoretically valid reasons for saying so.
  6. In fact, as a student, my advice to you would be to read an article willing yourself to disagree with the author. “How might this person be wrong?” is a great way to learn while reading. It is also a great way to keep yourself awake in class, trust me.
  1. Not all of the links will give you the exact answers, and that is deliberate. The last two questions being “unlinked” is also deliberate. If you are a student looking to work or study further in areas relating to macroeconomics, start building out a file with your answers to these questions (and many more!), and update the data on a regular basis.[↩]

A Summer Spent Doing Macroeconomics

Ashish1 Comment

Say you’re a student, and you’ve just finished learning a fair bit about macroeconomics. You’ve read and not understood Keynes, you’ve read and think you’ve understood Friedman, and you don’t have the faintest idea what folks in macro have been up to since Robert Lucas.

OK, all that is fine, but how should a budding macroeconomist spend her summer this year?

You could do a lot worse than reading this article, and asking yourself some simple questions.

Such as, do I hear you say? Read on!

Google mobility, for instance, is down more than 40 per cent since the start of April and currently at levels seen a year ago, when the national lockdown was in effect. This dynamic is also visible in the cross-section: states that forced down mobility more strongly have, in general, also seen a larger drop in positivity rates.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is Google Mobility? What does the data for India look like? How does this data correlate with statewise Covid-19 numbers? Can I create simple tables and charts in, say, Google Sheets that show a link between the two? And write up a blog about how I did it? Or maybe create YouTube tutorials that show how I did it?

That said, there’s growing evidence the impact will not be trivial even if not of the same scale as the first wave. By the middle of May, power demand was down 13 per cent and vehicle registrations were down 70 per cent compared to the start of the quarter, while e-way bills in the first half of the month were at 40 per cent of where they should be. A broader composite index would suggest activity is tracking a 6-7 per cent sequential decline this quarter and, while this is much shallower than the 25 per cent sequential contraction witnessed last year this time, the fact that it comes on the heels of the first shock, and can potentially trigger more hysteresis, remains a source of concern.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where does the data for power demand come from? Where does the data for vehicle registration come from? Where does GST data come from? What does the phrase “tracking a 6-7 percent sequential decline” mean? What is hysteresis?

Household income uncertainty and precautionary savings can be expected to rise. Even before the second wave, households had signalled caution about future spending (manifested in the RBI Consumer Confidence Survey) likely reflecting both an income hit and a precautionary savings motive. This behaviour is consistent with labour market dynamics wherein the unemployment rate, once adjusted for reduced labour force participation, had increased meaningfully even before the second wave.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the RBI Consumer Confidence Survey? How is it calculated (see Annexure A in this document)? Where do we get unemployment data from?

Private investment could also take time to pick up. Even before the second wave, utilisation rates were in the mid-60 per cent range, much lower than needed to jumpstart investment.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is OBICUS? It stands for Order Book, Inventory and Capacity Utilization Survey. How else do we track capacity utilization?

We have previously found a strong elasticity of India’s exports to global growth and, if that holds, this should drive a strong export rebound in India. Some of this is already visible in the data with manufacturing exports surging in recent months, and currently 18 per cent (in nominal dollar terms) above pre-pandemic levels.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where might that paper/research be, the one that talks about the strong elasticity of India’s exports to global growth? What does it tell us? What is different between the time that paper was written and today? Is that to India’s advantage or not? How do we tell?

If crude prices average close to $70 this fiscal year, as is expected, that would constitute a 50 per cent increase over last year and serve as a negative terms of trade shock that impinges on household purchasing power and firm margins — a process already underway.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

EIA? Or something else? Should we take lagged data? If yes, with what lag? If no, why not? Where do we get information on firm margins? Bloomberg/Reuters? If yes, do we have access to a terminal? If no, whom do we ask for a favor?

When all is said and done, the completeness of an economy’s recovery from Covid-19 — and therefore the level of scarring — is assessed by comparing its post-Covid-19 path of the level of GDP with the path forecasted pre-Covid-19. If the aforementioned forecasts fructify, the level of quarterly GDP at the end of this year would be about almost 8 per cent below the level forecasted pre-pandemic. To be sure, India will not be the only emerging market to be below its pre-pandemic path. In fact, among the large economies, only the US and China will surpass it. But that said, an 8 per cent shortfall is meaningful.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the level of GDP, and how is it different from the growth rate of GDP? Which should one use, and how does the answer change depending on the context? Where do we get data on GDP of all countries at one time? Which one of these measures should we use for comparison, and why?

Macro is hard, and in many different ways. Understanding the theory is hard, but piecing together parts of the puzzle from disparate (and at lest in India, gloriously unfriendly) data sources is perhaps harder still. But if you want to “do” macro for a living, being familiar with the answers to these questions is table stakes.

That is, getting familiar with the answers to the questions I have asked here gets you the right to sit at the table. Playing the game better than the others once you’re in is a whole different story. And playing the game means using this data with your knowledge of theory to try and take a stab at the really important questions:

The question, therefore, is how should economic policy respond to this second shock? With fiscal and monetary policy already quite expansive, is there space to respond further? We assess policy options and tradeoffs in a companion piece tomorrow.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Trust me, macro is hard.